Home' Trinidad and Tobago Guardian : October 26th 2014 Contents Client Situation
At age 50, Derek retired from
his job of 25 years, received
a substantial sum of money
and is seeking investment
opportunities that will better
the 1.0 per cent is currently
earning at the bank. He has been considering
various business ideas but has not found any-
thing that fits his management training and
His cousin Steve has been operating an air-
conditioning service for the past five years
and recently submitted a proposal to supply
and install 100 A/C units to a local hotel; the
bid was accepted and he committed to com-
mence the job in 90 days.
If Steve sources the product locally he will
get the contractor s 30-day credit and a 10
per cent discount off the retail price of $3,000
quoted in his proposal. If he sourced it directly
from China he would pay a landed cost of
$2,000 each but the minimum quantity would
be 150 units.
Steve believes that he can sell all of the units
in one year based on his current demand. The
clock is ticking and Steve has to make a deci-
sion quickly as the shipment takes over 60
days to arrive.
Steve has the skill but not the capital and
approached Derek to partner in the business
venture. Derek has enough money to finance
the entire project but is uncertain what is in
it for him and in what capacity he should get
Nick's assessment and advice
First off, it is quite clear that Steve has
everything to gain and nothing to lose. He can
get the product from his local supplier without
having to put out a cent, plus he has 30 days
If he invoices the hotel as soon as he installs
each unit, he can collect his funds in roughly
the same time frame that his supplier allows
him. In fact, jobs of this nature usually require
a mobilisation fee, so he may very well have
some capital available to pay up front for goods.
On the revenue side, Steve earns income
not only from the sale of the units but also
from their installation. Of course, the local
suppliers are taking full advantage of volume
discounts from China because they have access
to capital, which is exactly what Steve is trying
to achieve with Derek s help.
If they do decided to purchase directly from
China, they would need to have at least
$300,000 (150 units x $2,000) to place the
order. This move would more than triple the
gross profit on the units from $300 (10 per
cent) to $1,000 (33 per cent). Even if Steve
splits the spoils equally with Derek his earnings
would increase to $500 (16.5 per cent). If all
the units are sold in 12 months at the projected
retail price and there were no additional costs
each would pocket $75,000; half of the $150K
gross profit as illustrated in Table 1.
From Derek s perspective earning $75,000
in one year on a $300,000 investment trans-
lates into a 25 per cent return, which is a far
superior to the 1.0 per cent he is currently
collecting on his savings account. So everybody
What about the risks?
Very often people focus solely on the prof-
itability of a venture and ignore the obvious
risks that could compromise the entire invest-
ment. We already know that Steve has no
direct risk because he is not committing any
capital to the project. What about Derek: what
does he stand to lose if things go awry? And
what could possibly go wrong with this deal
anyway? Finally how can Derek protect himself
and his investment?
Derek can lose his entire investment from
the time he wires the money to China. Some
of the things that could go wrong include but
are not limited to:
• Units could arrive defective or damaged;
they could be lost or are stolen.
• The job can take longer than planned and
logistical problems could arise.
• The entire shipment may not be sold in
the expected time.
• The retail price may have to be slashed
to convert unsold stock to cash.
• Technology could quickly change and their
products could become obsolete.
• Costs such as storage or labor could erode
• Steve could be injured or fail to uphold
his end of the bargain.
• Client could refuse to pay and legal action
may be necessary.
Levels of involvement
and risk management
Even though Derek and Steve are relatives
this does not guarantee that they will agree
on everything. Very often when money is
involved disputes are unavoidable and it is
instructive to separate relationship from busi-
ness. This is especially so when one party is
providing the capital and the other the sweat
equity (effort/work) and profits are to be split
To minimise the likelihood of this occurring,
proper documentation should be done to pro-
tect the interest of each party and provide
legal recourse if things break down. Further
it would also outline each party s roles and
responsibilities so there is no ambiguity when
The following are some ways
Derek could approach the deal:
collateralised or unsecured
He can simply take on the role of banker
and lend the money to Steve without getting
directly involved in the day to day running of
the operations. If Steve defaults on principal
and interest payments in the promissory note,
Derek can move to recover his money by court
Derek could also hold or put a lien on Steve s
asset to serve as collateral; these could include
vehicles, equipment or property.
Specific contract with
profit sharing options
Both gentlemen could sign a contract for
the management and profit sharing of this
particular project. It could spell out how the
initial capital is to be treated at the end and
how they aught to split profits.
Unlike the debt financing option above in
which Derek is certain that his principal and
interest are to be repaid on schedule; this con-
tract or business agreement only states how
money is to be split if the outcome is
If the venture fails then Derek stands to lose
his entire investment, as is the case with any
business. To compensate him for the increased
risk Derek could require a larger share of the
profits after the business recovers the initial
capital. This contract could also outline roles
and responsibilities of each party.
Partnership or limited liability
If the guys are inclined to have a longer-
term business arrangement they can register
a partnership or a limited liability company
and agree on job descriptions, shareholdings,
profits and voting rights.
(Details were modified to protect client s iden-
Nicholas Dean (Cer-Fa) is a financial coach
and mentor who is the managing director
of the Financial Coaching Centre. He can
be contacted at:
OCTOBER 26 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL ROAD MAP | SBG7
Partnerships and risks
Very often people focus solely on the profitability of a venture and ignore the
obvious risks that could compromise the entire investment.
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